Bloomberg News

BOJ Struggles to Convince on 2% as Abenomics Shine Dims: Economy

By Masahiro Hidaka
November 05, 2013

A pedestrian walks past the Bank of Japan headquarters in Tokyo. The BOJ in April said it would double the monetary base in the next two years by stepping up purchases of government bonds and other financial assets. Photographer: Tomohiro Ohsumi/Bloomberg

Half a year after Bank of Japan
Governor Haruhiko Kuroda unleashed record monetary easing,
economists see the bank failing to meet its inflation target,
underscoring the case for stronger steps to revive the economy.

While the median estimate of BOJ board members released
last week showed the bank expects consumer prices to rise 1.9
percent in the 2015 fiscal year -- in line with a 2-percent-in-two-years goal laid out in April -- just two of 34 analysts
surveyed by Bloomberg News see the target met in that timeframe.

With the central bank seen standing pat on the pace of
asset purchases until it can assess the impact of an April 2014
sales-tax bump, the onus is now on the government to sustain
confidence in the Abenomics project. Prime Minister Shinzo Abe
has yet to introduce legislation such as corporate-tax cuts that
companies have advocated to boost Japan’s potential.

“Progress on the growth strategy has been slow,” said
Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance
Co. in Tokyo. “If the delays continue, foreign investors could
lose confidence in Abenomics, and stocks could fall.”

Japan’s benchmark Topix index of stocks -- still the best
performer among 24 developed markets this year in the aftermath
of Kuroda’s easing and a tumble in the yen that made exporters
more competitive -- trailed counterparts last month, signaling
waning enthusiasm with Abenomics. The Topix advanced less than
0.1 percent, the worst among the group tracked by Bloomberg.

Slowing Growth

The Topix fell less than 0.1 percent in Tokyo today, a
third day of decline as investors weighed corporate earnings and
a stronger yen drove down exporters. The Japanese currency
gained 0.2 percent to 98.45 per dollar at 4:00 p.m.

Fifteen of the economists surveyed said the lack of bolder
steps on the growth strategy is undermining the central bank’s
reflation campaign.

Bond investors’ inflation expectations haven’t changed
much, said Masamichi Adachi, a senior economist at JPMorgan
Chase & Co. in Tokyo. He cited a Quick survey carried out Oct.
29-31 that showed the average core consumer price inflation
expectation of 140 respondents over the next 10 years edged down
to 1.28 percent from 1.35 percent at the end of September.

“The BoJ’s target looks far away, at least if one asks
bond investors,” Adachi said in a report today.

Growth slowed to an annualized 2.1 percent in the three
months through September from 3.8 percent the prior quarter,
Nomura Securities Co. estimated. BNP Paribas SA said the
expansion likely slumped to 1.7 percent.

Kuroda Optimistic

Japan is on a path to achieve 2 percent inflation, Kuroda
said today in Osaka. The BOJ will adjust its policy as needed to
achieve stable 2 percent price increases, he said.

Abe said the current extraordinary Diet session would be
one for “getting things done,” reflecting a focus on pushing
through legislation for his growth strategy -- the “third
arrow” of his Abenomics project.

On the table are steps to encourage corporate restructuring
to boost industrial competitiveness and the introduction of
zones for deregulation in fields from medical treatment to urban
development. The cabinet today approved the special zone bill,
Economy Minister Akira Amari told reporters.

The yen’s about 12 percent slide against the dollar this
year has induced nascent inflation by boosting import costs. Yet
price gains remain distant from the BOJ’s target with core
prices excluding fresh food, the central bank’s key gauge,
rising 0.7 percent in September from a year earlier.

Wages Fall

Regular wages excluding overtime and bonuses fell for a
16th straight month in September, showing the potential squeeze
on households should inflation become embedded.

The 3-percentage point increase in the sales tax next year
is set to cause an annualized 4 percent contraction in the
second quarter even as Abe prepares 5 trillion yen ($50.7
billion) in stimulus to cushion the blow. A further two-point
rise to 10 percent is scheduled for October 2015.

Japan needs fresh demand to offset the restrictive fiscal
policy, and Abe comes up short when it comes to measures to spur
business investment, said Takuji Okubo, chief economist at Japan
Macro Advisors in Tokyo. The scale and speed of efforts to
remove international trade barriers, lower corporate taxes and
deregulate are inadequate, he said.

“If the growth strategy continues to lag, the economy will
turn down in April and I wouldn’t be surprised if stock prices
started to fall heavily,” said Okubo, who formerly worked at
Goldman Sachs Group Inc.

Monetary Base

The BOJ in April said it would double the monetary base in
the next two years by stepping up purchases of government bonds
and other financial assets. The measure stood at 189.8 trillion
at the end of October, up 45.8 percent from a year earlier, the
BOJ said today. It forecast in April that the monetary base will
increase to 270 trillion by the end of 2014.

Board members Takehiro Sato and Takahide Kiuchi said last
week the median 1.9 percent price view, which strips out the
effect of the sales-tax increases, was too optimistic. Sayuri Shirai, another BOJ policy maker, urged the central bank to more
clearly reflect downside risks in its outlook report.

The central bank should be prepared to ease further in the
case that growth plunges more than expected, Etsuro Honda, a top
economic aide to Abe, said in an interview last week.

‘Another Arrow’

The BOJ is likely to step up stimulus in the April-June
quarter to support the economy after the levy rise, according to
20 of the economists surveyed.

“The BOJ will need to fire another arrow aimed at
devaluing the yen if the Abe administration is unwilling to risk
a sharp economic slowdown,” Credit Suisse Group AG economists
Hiromichi Shirakawa and Takashi Shiono wrote in a report.

Elsewhere in Asia, the HSBC China Services PMI rose to 52.6
in October from 52.4 in September, according to a report
compiled by Markit, indicating a gain in services activity after
official data last week showed a manufacturing gauge increasing
to an 18-month high.

Premier Li Keqiang said China’s growth has entered a stage
of medium-to-high speed, meaning about 7.5 percent a year or
above 7 percent, according to the text of an Oct. 21 speech to
the All-China Federation of Trade Unions, posted yesterday on
its website. China needs growth of 7.2 percent to keep the urban
registered jobless rate at about 4 percent, Li said.

In Australia, the central bank left its benchmark interest
rate unchanged at a record low of 2.5 percent and said a weaker
currency will be needed to achieve balanced growth.

Data in the U.K. today are forecast to show house prices
rising in October at a faster pace than in the previous month.

To contact the reporter on this story:
Masahiro Hidaka in Tokyo at
mhidaka@bloomberg.net

To contact the editor responsible for this story:
Paul Panckhurst at
ppanckhurst@bloomberg.net